Analysis - BP, rivals signal rising oil prices over long term

By IBT Staff Reporter On 10/27/11 AT 10:32 AM

An increasing number of oil companies are likely to see $100-a-barrel oil as the new norm, a sign the price floor is moving up over the long run and a trend that could give a boost to stagnant merger activity in the industry.

The long-term price view of oil giants such as Royal Dutch Shell tends to be conservative because it underpins the planning of projects whose life can exceed half a century. Only a decade ago, the industry made its plans based on an oil price assumption of around $25 a barrel.

Since then, the likes of BP Plc have more than tripled their estimates and are now signalling that oil at $100 a barrel might be a new long-term reality.

I think you'll find more and more people in the industry using numbers of $90 to $100 a barrel going forward, BP Chief Executive Bob Dudley said this week, replying to a question on the price BP needs to turn a profit from new projects.

Oil hit a 2011 high of $127.02 in April, not far from its all-time high of $147 in 2008, and was trading at around $112 on Thursday.

Just three years ago, BP assumed $60 oil in its strategy address to investors.

If oil companies' assumptions of higher oil prices are realised, this will also be bad news for inflation at a time when central banks need to keep rates low to help the fragile global economy.

Shell Chief Financial Officer Simon Henry also mentioned $100 oil on Thursday after the company reported a doubling in third-quarter earnings to $7.2 billion, albeit more cautiously.

It has been pretty stable and robust above $100 this year in what have not been easy macroeconomic conditions. I can't really give a prediction, but it has stayed strong, he said.

BP's Dudley also declined to give a specific price outlook, saying demand from emerging economies would support the market and said BP was still testing projects at $75. Henry said Shell had a target to generate free cash at $80 oil.

We believe the price of energy, while it will be volatile, will be strong going forward, Dudley said. Growth in Asia and the emerging markets continues very, very strong.

M&A BOOST?

Wider acceptance that $100 oil is here to stay is likely to bring some joy back to the mergers-and-acquisitions (M&A) desks at major banks, which have sat empty-handed in recent months.

Sharp price volatility since the beginning of the year has drastically reduced M&A activity, said a banker with a major bank who declined to be identified by name.

On the buyer's side, the main concern on their mind is that you are catching a falling knife as there is a perception of more downside coming, the banker said.

On the seller's side, there must be an adjustment of expectations too, because many people are still unwilling to sell with memories of oil at $127, he said.

Companies have moved up their price thresholds not only in response to the rally in oil prices during the past decade but also as costs have climbed and the projects they are developing have become more complex and expensive.

Costs are rising because of higher prices for materials and services, such as steel and drilling rigs. A growing part of new supply is of more costly non-conventional oil, such as crude extracted from tar sands.

At the start of the 2000s, the companies would have tested projects at under $25 oil prices, said Jason Kenney, an oil analyst at bank Santander.

The cost base has changed significantly and the kind of assets they are investing in has changed significantly as well, he said. There are unconventional assets that need maybe $80 to $90 oil to break even.